What is a Home Loan? All You Need to Know About Home Loans in India
Nov 28, 2022
A home loan is a type of mortgage loan that allows individuals to purchase their dream home by borrowing funds from a financial institution. The borrowed funds are then repaid in small EMIs over a period along with applicable interest costs.
Let’s understand home loan in detail and how it works.
What is Home Loan?
A home loan or housing loan is a secured loan that is obtained by offering the house property to be bought as collateral to the lender. Lenders like SMFG Grihashakti offer up to 90% of the value of house property as a home loan and the remaining amount needs to be paid by the borrower upfront as a down payment.
Features of Home Loan
Higher loan amount:
Depending on your home loan eligibility and repayment capability, the lender offers up to 20 times of annual income (annual take-home salary) as a home loan. Using a home loan eligibility calculator, you can calculate the maximum home loan you can avail of based on your finances.
Low-interest Cost:
Home loan rate of interest is much lower compared to other types of loans, making it an affordable financing option for home buying and construction purposes.
Long Repayment Tenure:
A home loan has a long repayment tenure ranging between 25-30 years, depending on lenders. This makes it easier to repay the home loan without affecting your financial stability.
Tax Benefits :
In the Income Tax Act 1961, there are multiple provisions under which you can claim a tax deduction on principal and interest repayment of up to Rs 3.5 lakh annually.
Multiple Use-Cases:
A home loan can be used for the purchase of a new house, construction, and extension of an existing house, providing much flexibility to borrowers.
No prepayment penalty:
If you have selected a floating interest rate on your home loan, there is no prepayment penalty involved. This helps you to close your home loan account much before the tenure, saving significantly on interest costs.
Types of Home Loans
The following are the types of home loans offered by financial institutions:
Home purchase loan: The home purchase loan can be availed for the purchase of a new home from a real-estate developer or resale of existing house property.
Home improvement loan: The home improvement loan can be availed for home renovation. This could range from making some necessary changes to the structure as per the trends and requirements, changing tiles, painting walls, etc.
Home construction loan: This loan category can be availed of when you want to build your dream house from scratch on a vacant plot of land. The loan amount is disbursed as per the completion of milestones linked to the construction of the house property.
Home extension loan: If you have an existing house property and want to extend it by means of adding floors or rooms, a home extension loan perfectly fits your requirement.
How Home Loan Works?
Availing of a home loan is a big decision as you have to commit a part of your income for the long term for repayments. Before availing of a home loan, you need to understand, how a home loan works?
A home loan is availed of by offering house property that is bought or constructed as collateral with the lender. The lender keeps the right over your property until full repayments are done.
In case of default, the lender takes over the property to recover dues to avoid loss.
At the end of home loan tenure, after successfully repaying the home loan, the lender forgoes the right over property, and all original documents are returned.
Important Terms & Conditions of Home Loan
When you are considering a home loan, you will frequently come across terms such as principal amount, loan to value ratio, EMI, and so on. Understanding the basics of these terms will help you make informed financial decisions. Let us take a look at these terms in more detail.
Principal amount
Principal amount is the total amount of money that you borrow from the lender. It is the sum you need to pay over the loan term, in addition to the interest that is charged on the amount.
Loan to value ratio
A Loan-to-Value (LTV) ratio in a home loan is a value that reflects the percentage of the value of the property that a lender can give to the borrower. It is generally calculated using the following formula:
LTV Ratio (%) = Amount Borrowed/Property Value x 100
Rate of interest
The rate of interest is a percentage of the principal amount. It can be considered as the amount charged by the lender to the borrower for using their funds. A lower interest rates leads to a lower overall cost of borrowing, while a higher interest rate has the opposite effect.
Tenure
Loan tenure is the period of time over which you have to repay the loan. Generally, for home loans, the repayment tenure is up to 30 years. While a longer loan tenure may reduce your monthly payments, they can lead to you paying more in interest costs.
Equated Monthly Instalments (EMI)
EMI stands for Equated Monthly Installment. It is the amount which has to be paid by the borrower to the lender every month on a pre-specified date, over the term of the loan. Both principal amount and interest are included in this amount.
How to Get a Home Loan?
The first step to getting a home loan is to compare and research the lender based on your requirement.
Once you have zeroed on the lender, you can avail of a home loan by fulfilling all the eligibility criteria and providing the necessary documents requested by the lender.
Eligibility Criteria
- Must be an Indian resident
- Must be of minimum 21 years and maximum 65 years at the time of loan maturity
- Minimum CIBIL score of 700
- Must fulfill the minimum income eligibility and have a stable income source
To check the maximum home loan amount you could get, you can use the home loan eligibility calculator and get an estimate.
Documents Required
- PAN and KYC documents
- Income proof (Form 16, last 2 years ITR, salary slips for salaried and valid income proof for self employed)
- Bank statements of the past 6 months
- Documents relating to the property you wish to purchase
You must have understood the meaning of the home loan and how it helps you in buying your dream home without straining your finances. While applying for a home loan, ensure the resulting EMI doesn’t cause more than 50% of your monthly household income in order to ensure that your finances don’t feel strained. One should strictly adhere to the repayment timelines, and always pay the EMIs in full. In case of default, it negatively impacts your credit score and you may have to pay penalties.
FAQ's
What is the maximum amount of loan that one can get for buying a house ?
The maximum amount of loan you can borrow for buying a house may differ from lender to lender. SMFG Grihashakti offers home loans up to INR 5 1 crores* or up to 90% of the property value.
What is the minimum down payment required for a home loan ?
SMFG Grihashakti offers up to 90% of the property value as a home loan. The remaining amount must be paid by the borrower as down payment.
What is the loan tenure for a home loan ?
The tenure can vary depending on the lender. Generally, home loan tenures range from 10 years to 30 years.
Can I sell my property for more than market value?
Yes, you can sell your property for more than the prevailing market value, but it might pose challenges in attracting potential buyers. Pricing significantly above market rates might deter buyers unless unique features or circumstances justify the higher price.
What is the interest rate for a home loan ?
Home loan interest rates can vary from lender to lender. SMFG Grihashakti offers interest rates starting from 10% per annum* (11% per annum* for self-employed individuals).
Can a co-applicant be added to a home loan ?
Yes, a co-applicant can be added to a home loan, especially if they too have a strong credit score and history. It reduces the risk for the lender and reduces the payment burden for the borrowers.
What are the tax benefits of a home loan ?
Under the Income Tax Act, you can get the following tax benefits on a home loan:
- Under Section 80C, deductions of up to INR 1.5 lakhs, provided you meet certain conditions.
- Under Section 24, deductions of up to INR 2 lakhs provided you meet certain conditions.
Can a home loan be prepaid or foreclosed ?
Yes, most financial institutions let you prepay or foreclose a loan. However, there might be a fee or a penalty associated with the same.
What are the processing fees and other charges associated with a home loan ?
Here is a quick overview of the charges and fees associated with a home loan:
| Home Loan Interest Rate |
- Starts at 10%* per annum for the salaried
- Starts at 11%* per annum for the self-employed
|
| Type of Interest Rate |
Floating Rate of Interest |
| Processing Fee |
Up to 3% of the loan amount |
| Switch Fee Charges for Change in Loan Interest Type |
An amount not exceeding 1.00% of the outstanding principal amount |
| Cheque/ECS/NACH Dishonoured Charges |
INR 500 per instance |
| Prepayment Charges (In Part or Full) |
No foreclosure charges/ pre-payment charges will be applicable on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligant(s). All Semi-fixed rate (combination of fixed and floating) loans shall attract the pre-closure norms applicable to fixed/ floating rate depending on whether at the time of pre-closure, the loan is on fixed or floating rate |
How long does it take for a home loan to be approved ?
It can take around 15 to 21 days for a home loan to be approved, as it involves assessing valuation of the property. However, the time taken is subject to your eligibility as well as the accuracy of the submitted documents. Once the loan is approved, it can be disbursed within 72 hours*.
Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.